1/09/2012

Euro Falls Ahead of Merkel-Sarkozy Meeting in Berlin

Greece's continuing inability to bring its debt problems under control is putting the euro under severe pressure ahead of Monday's meeting between Angela Merkel and Nicolas Sarkozy, which is expected to prepare the next EU summit on Jan 30. The Czech central bank chief said Greece may have to quit the euro.

The euro crisis has returned with a vengeance after the Christmas break, with the single currency sliding to below $1.27, its weakest level since September 2010, due to fresh concern about a Greek insolvency, and Chancellor Angela Merkel and French President Nicolas Sarkozy due to meet for another summit in Berlin at midday. A joint news conference at the Chancellery is scheduled for 1:30 p.m. CET.

According to information obtained by SPIEGEL, the International Monetary Fund doesn't believe Athens will be able to go on servicing its debts under its current reform plans. According to an internal IMF document, Greece will have to either cut back its budget even more, or private creditors will have to accept a bigger haircut on their Greek bonds, or the euro member states will have to provide more funding to the struggling country.
Meanwhile, European Union partners are getting increasingly impatient with Greece. The head of the Czech central bank, Miroslav Singer, said Greece may have to leave the euro zone if its European partners don't provide it with substantial additional aid.

Greece Needs 'Massive' Help to Avert Euro Exit

"If there is not the will to give Greece a massive amount of money from European structural funds, I do not see any other solution than its departure from the euro zone and a massive devaluation of the new Greek currency," he told Hospodarske Noviny newspaper in an interview published on Monday.

"So far Greece has been given loans that served mainly for buying time and for rich Greeks to move their money out of the country. This lowers the trustworthiness of Europe and the willingness of non-European countries to lend or provide new capital to the International Monetary Fund for helping Europe."

Asked about what Europe should do to avert the debt crisis, Singer said European politicians should acknowledge that banks may need more capital. "We have to stop pretending that we will never recapitalize banks again," he said.

"In connection with the Greek crisis, it will possibly be necessary to pour money even into quite large banks which will suffer losses," Singer said. "It is necessary to immediately focus on banks' problems."

"This is, however, hitting awful obstacles in large European countries. There are politicians who said strong words -- never, never never."

Fifty Percent Haircut 'Probably Not Enough'

Greece's private creditors -- mainly banks and insurance firms -- had agreed last year to forego 50 percent of their loans to Greece, but it is looking increasingly doubtful that the planned debt forgiveness of €100 billion ($127 billion) will be enough to keep Greece afloat. Euro-zone governments may have to boost the second bailout package of €130 billion they agreed for Greece in 2011.

The finance policy spokesman of the opposition Green Party in the German parliament, Gerhard Schick, told the Berlin daily Tagesspiegel on Monday that the planned debt forgiveness of 50 percent "probably won't be enough."

If the private creditors can't be persuaded to forego a higher share of their bonds, public creditors including German taxpayers will have to make a bigger contribution, he said. "It is becoming evident that the plans made so far won't suffice to solve Greece's problem over the long term," said Schick.

Delegates from the so-called troika comprised of the European Commission, the European Central Bank and the International Monetary Fund will return to Greece on Jan. 16 to assess the country's progress on budget cuts and reforms it pledged in return for international aid.

Possible Disagreement at Merkel-Sarkozy Meeting

At their meeting on Monday, Merkel and Sarkozy are expected to discuss ways to boost growth in euro-zone states and finalize a deal to increase fiscal coordination within the currency union. Their talks are aimed at preparing the ground for the next EU summit on Jan. 30 to discuss the next steps in tackling the debt crisis.
One bone of contention is likely to be Sarkozy's recent announcement that he plans to unilaterally introduce a tax on financial transactions, a move likely driven by his desire to boost his chances of re-election in April. Germany remains adamant that such a tax should only be introduced on an EU-wide level.

There may also be disagreement on the extent to which the "fiscal compact" on binding budget discipline to be agreed by 26 of the 27 EU members will be integrated into the framework of the permament bailout fund, or European Stability Mechanism, due to be set up this year. The German government wants countries only to be able to draw on the ESM if they are adhering to the fiscal compact.